Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Inverted Dead-Cat Bounce: Summary

Lessons are learned the hard way, and I am going to share one with you now. I think it's like telling a boy not to touch a hot stove. "You're gonna get burned..." you warn, but he
touches it anyway.

The lesson is simple. If a stock you own gaps up by 5% or more, sell it the next day. That event pattern is called an
inverted dead-cat bounce, and I am finding it to be one of the more reliable patterns. This article discusses a trade using that event pattern.

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For an in-depth analysis of event patterns, grab a copy of my book,
Encyclopedia of Chart Patterns Second Edition, pictured on the right. I discuss 10 event patterns, including the inverted dead-cat bounce,
near the back of the book.

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Inverted Dead-Cat Bounce: Background Lesson

An inverted dead-cat bounce is an event pattern so named because it seemed to be the opposite of a dead-cat bounce.

The inverted dead-cat bounce occurs when a company announces news that sends the stock soaring by 5% to 20% or even higher. This event is not caused by takeover news because
that event pattern shows a stock moving up and staying up. Rather, the inverted dead-cat bounce is often earnings related or because of positive results from clinical drug trials,
patent dispute resolutions, legal awards, contract wins, oil patch discoveries, and so on.

After price spikes upward, it often drops back down within a week or two.

A frequency distribution of price movement over time suggests that fewer than half the stocks make a higher high the day after the announcement, but
you can place a limit order to sell at the prior day's high and see if it hits. You will want to day trade the exit, if you can, to maximize profits.

Inverted Dead-Cat Bounce: Trading J Crew

That is the lesson. Let's see how it applies to an actual trade.

When the Obama administration took office in late January 2009, I remember Mrs. Obama getting press for liking J. Crew clothing, but I dismissed it. Then in April, I heard the news stories again
while exercising on my treadmill. I thought, "The company is going to have a good quarter because of the publicity." So, I bought the stock as the chart shows (daily scale).

Not shown is that the stock had broken above a congestion area setup by a three peak formation in December 2008
(think triple top or head-and-shoulders top). After that, I held onto the stock.

Fast forward to May 28. I show that as point A on the chart, the day before price gapped up. The company reported quarterly earnings after the
close. Profit dropped a massive 33%, but the company predicted profits in the next quarter instead of a loss the street was expecting.

The next day, price gapped open higher. A day later, sell day (B), I thought about this situation and decided to hold. I thought the rise
had legs, meaning it would continued moving up in the coming days. That happens sometimes, not from better than expected earnings, but most often from future guidance by the
company, as in this case.

As you can see, holding was a mistake. I eventually sold and made 65% on the trade, but I could have done better. I sold at 25.296 but the day after the event
(B), the stock ranged from 25.90 to 27.94. After I sold, the stock bottomed at 22.58.

The moral of the story is this: If the market gives you a gift, take it and run before it snatches it back.

Inverted Dead-Cat Bounce: The Conseco Trade

When price climbed out of a congestion zone, I bought and received a fill at $1.64. I forgot about the earnings report. My intent was to hold the stock for the long term, to see
it climb from 1.64 to 17 or even 25.

Each day price seemed to climb but I did not focus on it. If the stock market did well (which I expect), then the stock would also. Why? Because insurance companies take their outrageous premiums
they charge you and me and invest it in the stock market. If their investments rise, the worth of the company rises and the stock should follow.

When I looked at CNO this morning (Monday 5/11/2009). It did not dawn on me that the stock had gapped up 45% (from yesterday's close of 2.69 to a high so far of 3.90). Then I went
searching for the reason for the gap. Earnings. The company announced earnings this morning, something that I forgot about. Fortunately, they were better than the market expected.